Expanding Your Business through Franchising
By Sumeet P. Shah You have a great business concept and are evaluating ways to expand your brand and your operations. Have you thought about franchising your business? Franchising is a method of distributing products or services. This business model involves a Franchisor who lends his intellectual property and business concept and a Franchisee who pays a royalty and an initial fee for the right to do business under the franchisor’s name and system. Once this contractual agreement is reached by the two parties, a Franchise is created. What is needed to offer a franchise? Sumeet P. Shah is Principal Attorney at Shah Legal Group, LLC in Atlanta, Georgia. His areas of practice include franchise, corporate, real estate, and estate planning and business litigation. He can be reached at sumeet.shah@shahlegalgroup.com or (678) 274-9335.
According to the U.S. Census Bureau, franchises make up more than 10.5 percent of employer businesses. In 2010, President Obama signed into law the Small Business Jobs Act that permanently increased Small Business Administration (SBA) loan limits from $2 million to $5 million. The Act also temporarily extends the 90 percent loan guarantee rate and reduces borrower fees in the SBA program. The law permanently increased microloan limits from $35,000 to $50,000 helping more entrepreneurs with start-up costs. This change in law has increased the access to capital for individuals looking to open a small business which in turn is helping franchisors expand their business through franchisees.
You may be asking what kinds of businesses lend themselves to franchising. Virtually every type of business you can imagine can be a franchise. The International Franchise Association now lists more than 75 different categories to describe its members. Typically, you would think of fast food and restaurants first when thinking of franchising, but franchising covers a wide spectrum from advertising/direct mail to construction to dating services to home inspection to security systems to video sales and rentals. Other examples of successfully applying franchising to established industries are: printing and copying services, maid services, computer services, cleaners, lawn care services, real estate, hotels and motels, and travel agencies.
There are many legal aspects when beginning the process of franchising. Federal and State law govern franchising and the first legal requirement will be to prepare a Franchise Disclosure Document (FDD). This document, called the Uniform Franchise Offering Circular (UFOC) or the FDD is required of all companies by the Federal Trade Commission if they want to offer franchises for sale anywhere in the United States. The disclosure document “discloses” in plain English certain provisions of the franchise agreement and other pertinent information of the franchisor. The disclosure document includes such items as initial fees, royalty fees, estimated initial investment, financial statements and litigation history. The disclosure has to be provided to a potential franchisee 14 days prior to any contractual franchise agreement between the franchisor and franchisee.
Additionally, a number of states have their own registration requirements that must be met before offering a franchise in those states. The franchisor has to pay a registration fee and provide other disclosures that the state may require to register the franchise. Once the registration packet has been submitted and approved by the state, a franchisor can offer their franchise in that state. Once registered, an annual renewal registration of the franchise will have to be completed. If there is a material modification to the franchise agreement then this change will also have to be registered and disclosed.
There are also financial aspects to the franchising process. One of the disclosure requirements is to have audited financial statements of the franchisor by an independent certified public account of the past two or three fiscal years. These statements include balance sheet and income statements. Another disclosure that may be included is financial projections of the prospective franchise. The franchisor may also want to consider if they are going to create another company for the new franchise, or use the existing business entity to carry out the franchising. Utilizing an experienced accountant to help in preparing your financial statements and devising your business structure is highly recommended.
Before you can begin the franchising process, the business system will have to be developed and thoroughly documented. This includes the product and services to be provided and all the materials, products, and merchandise to be used to conduct the business. Other parts of the business system include any intellectual property such as a trademark or copyright that may need to be developed. A detailed training plan and operating manual that will help the franchisee understand the business and the operations is also necessary. A marketing plan that will help a franchisee get the business off and running and a sales plan for the franchisor to appeal to potential franchisees are also integral components of the business system.
The help of a skilled attorney in franchise law is essential when navigating the course of franchise creation. Creating a disclosure that complies with federal and state laws as well as a franchise agreement that protects the franchisor’s intellectual property including such proprietary information as training and an operations manual is extremely important to a franchisor’s competitive advantage.
If you are a business owner and have a great concept and are looking to expand your business, think about franchising your business.
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